SEC Info - Culp Inc. - ‘10-Q’ for 8/2/20

Raw materials

i 7,742

i 6,467

i 7,823

Work-in-process

i 2,292

i 2,677

i 1,958

Finished goods

i 30,368

i 41,516

i 38,126

i 40,402

i 50,660

(1)

i 47,907

(1)

As of August 4, 2019, inventory totaled $ i 50.7 million, of which $ i 47.6 million and $ i 3.1 million were classified as inventory and within current assets – discontinued operation, respectively, in the accompanying Consolidated Balance Sheet.

/ / i

7. Intangible Assets

A summary of intangible assets follows:

(dollars in thousands)

Tradenames

i 540

i 7,232

i 540

Customer relationships, net

i 2,162

i 2,463

i 2,238

Non-compete agreement, net

i 584

i 659

i 602

i 3,286

i 10,354

(1)

i 3,380

(1)	As of August 4, 2019, intangible assets totaled $ i 10.4 million, of which $ i 3.8 million and $ i 6.6 million were classified as intangible assets and within noncurrent assets – discontinued operation, respectively, in the accompanying Consolidated Balance Sheets.

Tradenames

Our tradename totaling $ i 540,000 as of August 2, 2020, pertained to Read, a separate reporting unit within the upholstery fabrics segment. This tradename was determined to have an indefinite useful life at the time of its acquisition, and therefore, is not being amortized. However, we are required to assess this tradename annually or between annual tests if we believe indicators of impairment exist. Based on our assessment as of August 2, 2020, no indicators of impairment existed.

However, during our annual assessment as of May 3, 2020, we performed a qualitative assessment in which we concluded that it was more-likely-than-not that the fair value of Read’s tradename was less than its carrying amount. This conclusion was based on impairment indicators that existed, such as our unfavorable financial performance during the fourth quarter of fiscal 2020 and the significant decline in the price per share of our common stock and market capitalization stemming from the COVID-19 global pandemic. Since we determined it was more-likely-than-not that the fair market value of Read’s tradename was less than its carrying amount, we performed a quantitative impairment test. Our quantitative impairment test involved determining the fair value of Read’s tradename and comparing the respective fair value of Read’s tradename with its carrying amount. Consequently, based on our quantitative impairment test, we recorded an asset impairment charge totaling $ i 143,000 during the fourth quarter of fiscal 2020.

As a result of our quantitative impairment test, we determined the fair value of our tradename was $ i 540,000 using the relief from royalty method. This method used significant unobservable inputs and therefore, the fair value of our tradename was classified as level 3 within the fair value hierarchy.

I-12

Customer Relationships

A summary of the change in the carrying amount of our customer relationships follows:

	Three months ended
(dollars in thousands)	August 2, 2020			August 4, 2019
Beginning balance	$	i 2,238		$	i 2,538
Amortization expense		( i 76	)		( i 75	)
Ending balance	$	i 2,162		$	i 2,463

Our customer relationships are amortized on a straight-line basis over useful lives ranging from i nine to i seventeen years.

The gross carrying amount of our customer relationships were $ i i i 3.1 / / million as of August 2, 2020, August 4, 2019, and May 3, 2020, respectively. Accumulated amortization for these customer relationships were $ i 953,000, $ i 652,000 and $ i 877,000 at August 2, 2020, August 4, 2019, and May 3, 2020, respectively.

The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2021 - $ i 226,000; FY 2022 - $ i 301,000; FY 2023 - $ i 301,000; FY 2024 - $ i 301,000; FY 2025 - $ i 301,000; and thereafter - $ i 732,000.

The weighted average amortization period for our customer relationships is i 7.4 years as of August 2, 2020.

Non-Compete Agreement

A summary of the change in the carrying amount of our non-compete agreement follows:

	Three months ended
(dollars in thousands)	August 2, 2020			August 4, 2019
Beginning balance	$	i 602		$	i 678
Amortization expense		( i 18	)		( i 19	)
Ending balance	$	i 584		$	i 659

Our non-compete agreement is amortized on a straight-line basis over the fifteen-year life of the agreement.

The gross carrying amount of our non-compete agreement was $ i i i 2 / / .0 million as of August 2, 2020, August 4, 2019, and May 3, 2020, respectively. Accumulated amortization for our non-compete agreement was $ i 1.5 million as of August 2, 2020, $ i 1.4 million as of August 4, 2019, and $ i 1.4 million as of May 3, 2020.

The remaining amortization expense for the next five years and thereafter follows: FY 2021 - $ i 56,000; FY 2022 - $ i 76,000; FY 2023 - $ i 76,000; FY 2024 - $ i 76,000; FY 2025 - $ i 76,000, and Thereafter - $ i 224,000.

The weighted average amortization period for the non-compete agreement is i 7.8 years as of August 2, 2020.

8. Investment in Unconsolidated Joint Venture

Culp International Holdings, Ltd. (Culp International), a wholly-owned subsidiary of the company, entered into a joint venture agreement pursuant to which Culp International owns i fifty percent of Class International Holdings, Ltd. (CLIH). CLIH produces cut and sewn mattress covers in an i 80,000 square foot facility located in a modern industrial park on the northeastern border of Haiti, which borders the Dominican Republic. CLIH complements our mattress fabric operations with a reactive platform that enhances our ability to meet customer demand while adding a lower cost operation to our platform.

On December 20, 2019, CLIH entered into an agreement to construct an additional plant facility totaling i 40,000 square feet, which is currently expected to be completed during the second quarter of fiscal 2021. This new plant facility will be near our existing operations and will provide additional capacity that will enhance our ability to produce sewn covers. This agreement requires payments totaling $ i 1.2 million, of which $ i 600,000 was paid in February 2020, $ i 180,000 was paid May 2020, and the remaining balance of $ i 420,000 is to be paid upon completion.

CLIH reported net income totaling $ i 134,000 and $ i 26,000 for the three-month periods ending August 2, 2020, and August 4, 2019, respectively. Our equity interest in CLIH’s net income was $ i 67,000 and $ i 13,000 for the three-month periods ending August 2, 2020, and August 4, 2019, respectively.

I-13

The following table summarizes information on assets, liabilities, and members’ equity of our equity method investment in CLIH:

(dollars in thousands)

Total assets

i 3,668

i 3,161

i 3,338

Total liabilities

i 149

i 120

i 133

Total members’ equity

i 3,519

i 3,041

i 3,205

As of August 2, 2020, August 4, 2019, and May 3, 2020, our investment in CLIH totaled $ i 1.8 million, $ i 1.5 million, and $ i 1.6 million, respectively, which represents the company’s i fifty percent ownership interest in CLIH.

9. Accrued Expenses

A summary of accrued expenses follows:

(dollars in thousands)

Compensation, commissions and related benefits

i 4,549

i 3,493

i 3,038

Interest

—

i 13

i 9

Other accrued expenses

i 3,420

i 5,393

i 2,807

i 7,969

i 8,899

i 5,854

As of August 2, 2020, we had accrued expenses totaling $ i 8.0 million, of which $ i 7.9 million and $ i 117,000 were classified as current accrued expenses and long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets. As of August 4, 2019, we had accrued expenses totaling $ i 8.9 million, of which $ i 8.1 million, $ i 333,000, and $ i 462,000 were classified as current accrued expenses, long-term accrued expenses, and current liabilities – discontinued operation, respectively, in the accompanying Consolidated Balance Sheets. As of May 3, 2020, we had accrued expenses totaling $ i 5.9 million, of which $ i 5.7 million and $ i 167,000 were classified as current accrued expenses and long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets.

10. Lines of Credit and Paycheck Protection Program Loan

Revolving Credit Agreement – United States

Our Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) provides a revolving loan commitment of $ i 30 million, is set to expire on i August 15, 2022, and allows us to issue letters of credit not to exceed $ i 1 million.

Interest is charged at a rate (applicable interest rate of i 1.75%, i 3.68%, and i 1.75% as of August 2, 2020, August 4, 2019, and May 3, 2020, respectively) as a variable spread over i LIBOR based on our ratio of debt to EBITDA.

Outstanding borrowings are secured by a pledge of i 65% of the common stock of Culp International Holdings Ltd. (our subsidiary located in the Cayman Islands), as required by the Credit Agreement.

As a result of the COVID-19 global pandemic and the uncertainty relating to the unknown duration and overall effect on the company, we proactively took a precautionary measure and borrowed the maximum amount available from this line of credit during the fourth quarter of fiscal 2020. Consequently, we had outstanding borrowings of $ i 29.8 million under the Credit Agreement as of May 3, 2020. During June 2020, we repaid the entire $ i 29.8 million outstanding balance, and as a result, there were i no borrowings outstanding under the Credit Agreement as of August 2, 2020. Additionally, there were i no borrowings outstanding under the Credit Agreement as of August 4, 2019.

As of August 2, 2020, August 4, 2019, and May 3, 2020, there were $ i i i 250,000 / / in outstanding letters of credit (all of which related to workers compensation) provided by the Credit Agreement. As of August 2, 2020, we had $ i 750,000 remaining for the issuance of additional letters of credit.

Seventh Amendment to the Credit Agreement

Effective June 30, 2020, we entered into a Seventh Amendment to our Credit Agreement which includes provisions that (i) modify the method for calculating the company’s debt to EBITDA covenant under the Credit Agreement solely during the temporary period beginning on the date of the Seventh Amendment and ending on the Rate Determination Date (as defined in the Credit Agreement), next following the end of the company’s fiscal 2021 fourth quarter (such temporary period, the “Modification Period,”), and (ii) amend the pricing matrix used to determine the interest rate payable on loans made under the Credit Agreement solely during the Modification Period.

I-14

Specifically, the Seventh Amendment provides that during Modification Period, the company’s ratio of debt to EBITDA shall be determined by excluding the fourth quarter of fiscal 2020 from the calculation thereof, such that the ratio shall be determined using the four most recent quarterly periods other than (i.e. excluding) the fourth quarter of fiscal 2020, rather than calculating on a rolling four-quarter basis. It further provides that during the Modification Period, the Applicable Margin (as defined in the Credit Agreement) set forth the pricing matrix is increased to i 1.6% for price level I, i 2.05% for price level II, i 2.5% for price level III, and i 3.00% for price level IV.

Additionally, the Seventh Amendment (i) changes the capital expenditure covenant by reducing permitted annual capital expenditures to $ i 10 million during fiscal year 2021, (ii) changes the liens and other indebtedness covenant to reduce the permitted amount of allowable liens and other indebtedness to i 5% of consolidated net worth, and (iii) adds a new covenant that prohibits the company, solely during the Modification Period, from paying dividends or repurchasing stock in excess of $ i 10 million in the aggregate during the Modification Period.

Revolving Credit Agreement – China

We have an unsecured credit agreement associated with our operations in China that provides for a line of credit up to i 40 million RMB’s ($ i 5.7 million USD as of August 2, 2020). i This agreement has an interest rate determined by the Chinese government at the time of borrowing and is set to expire on i December 4, 2020. As of May 3, 2020, there were outstanding borrowings under the agreement totaling $ i 1.0 million, at an applicable interest rate of i 2.41%. / During June 2020, we repaid the entire $ i 1.0 million outstanding balance, and as a result, there were i no borrowings outstanding under the agreement as of August 2, 2020. Additionally, there were i no borrowings outstanding under the agreement as of August 4, 2019.

Small Business Administration - Paycheck Protection Program

On April 15, 2020, we received a loan of $ i 7.6 million (the “Loan”) pursuant to the U.S. Small Business Administration (the “SBA”) Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”). We planned to use the proceeds from the Loan for covered payroll costs, rent, and utilities in accordance with the applicable terms and conditions of the CARES Act. We believed the Loan would enable us to retain more of our employees, maintain payroll and benefits, and make lease and utility payments while producing and supplying critical products for essential businesses during the COVID-19 global pandemic.

Following our application and receipt of the Loan, the SBA and U.S. Treasury Department issued new guidance regarding eligibility requirements under the PPP, raising questions regarding the eligibility of publicly traded companies to receive loans under the program. As a result, out of an abundance of caution, we voluntarily repaid the Loan in full on May 13, 2020.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of August 2, 2020, we were in compliance with these financial covenants.

11. Fair Value of Financial Instruments

ASC Topic 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy.

The hierarchy consists of three broad levels as follows:

Level 1 – Quoted market prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable; and

Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.

The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter based on various factors and it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between different levels will be rare.

I-15

Recurring Basis

The following table presents information about assets measured at fair value on a recurring basis:

Fair value measurements as of August 2, 2020 using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

Premier Money Market Fund

i 7,533

N/A

i 7,533

Short Term Bond Funds

i 983

N/A

i 983

Growth Allocation Fund

i 246

N/A

i 246

Moderate Allocation Fund

i 71

N/A

i 71

Other

i 66

N/A

i 66

Fair value measurements as of August 4, 2019 using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

Premier Money Market Fund

i 6,920

N/A

i 6,920

Growth Allocation Fund

i 213

N/A

i 213

Moderate Allocation Fund

i 130

N/A

i 130

Other

i 84

N/A

i 84

Fair value measurements as of May 3, 2020 using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

Premier Money Market Fund

i 7,496

N/A

i 7,496

Short Term Bond Funds

i 923

N/A

i 923

Growth Allocation Fund

i 219

N/A

i 219

Moderate Allocation Fund

i 63

N/A

i 63

Other

i 56

N/A

i 56

Short-Term Investments – Available for Sale

Our short-term investments classified as available for sale consisted of a short-term mutual bond funds and had an accumulated unrealized gain totaling $ i 6,000 as of August 2, 2020, and $ i 9,000, as of May 3, 2020. Our short-term investments classified as available for sale were recorded at their fair values of $ i 983,000, and $ i 923,000 as of August 2, 2020, and May 3, 2020, respectively. As of August 2, 2020, and May 3, 2020, the fair value of our short-term investments approximated their cost basis. There were i no short-term investments classified as available for sale on August 4, 2019.

Short-Term and Long-Term Investments - Held-To-Maturity

Our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds, foreign bonds, and government bonds with original maturities that range from i 2 to i 10 years, all of which have remaining maturities of less than i 2 years as of August 2, 2020. These investments were classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments were recorded as either current or noncurrent on our Consolidated Balance Sheets, based on the maturity date in relation to the respective reporting period and recorded amortized cost.

As of August 2, 2020, and May 3, 2020, our held-to-maturity investments recorded at amortized cost totaled $ i 6.4 million and $ i 6.3 million, respectively. The fair value of our held-to-maturity investments as of August 2, 2020, and May 3, 2020, totaled $ i 6.5 million and $ i 6.4 million, respectively. There were i no investments classified as held-to-maturity on August 4, 2019.

Our bond investments were classified as level 2 as they were traded over the counter within a broker network and not on an active market. The fair value of our bond investments were determined based on a published source that provided an average bid

I-16

price. The average bid price was based on various broker prices that were determined based on market conditions, interest rates, and the rating of the respective bond investment.

Current Expected Credit Loses (CECL)- Available for Sale and Held-To-Maturity Investments

As of May 4, 2020, we did not have an allowance for credit losses related to our short-term available for sale and held-to-maturity investments, which are comprised mostly of fixed income securities that are predominantly high-grade U.S. and foreign corporate bonds, U.S. Treasury bonds, and short-term mutual bond funds.

As a result of our adoption of Topic 326 effective May 4, 2020, we determined that our credit loss exposure was immaterial due to the short-term nature of our mutual bond funds and we have experienced historically low unrealized losses and gains during past reporting periods. In addition, it is not our intention to sell or likely that we will be required to sell our held-to-maturity investments before the recovery of their amortized cost basis.

As of August 2, 2020, we reported an accumulated unrealized gain of $ i 6,000 associated with our short-term investments classified as available for sale. As mentioned above, it is not our intention to sell or is likely that we will be required to sell our held-to-maturity investments before the recovery of their amortized cost basis. Accordingly, we did not record any credit loss expense during the three-months ending August 2, 2020.

Long-Term Investments - Rabbi Trust

We have a rabbi trust to set aside funds for participants of our deferred compensation plan (the “Plan”), which enables its participants to credit their contributions to various investment options of the Plan. The investments associated with the rabbi trust consist of a money market fund and various mutual funds that are classified as available for sale.

The long-term investments associated with our rabbi trust were recorded at their fair values of $ i 7.9 million, $ i 7.3 million, and $ i 7.8 million as of August 2, 2020, August 4, 2019, and May 3, 2020, respectively. The long-term investments associated with our rabbi trust had an accumulated unrealized gain of $ i 53,000 as of August 2, 2020, an unrealized gain of $ i 46,000 as of August 4, 2019, and an unrealized loss of $ i 19,000 as of May 3, 2020. The fair value of our long-term investments associated with our rabbi trust approximates their cost basis.

Other

The carrying amount of our cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximates fair value because of the short maturity of these financial instruments.

Nonrecurring Basis – Fourth Quarter Fiscal 2020

Continuing Operations

In accordance with ASC Topic 350 Intangibles – Goodwill and Other, we are required to assess our goodwill and tradename for impairment annually or between annual tests if we believe indicators of impairment exist. Accordingly, we performed our annual assessment of goodwill associated with our mattress fabrics segment and goodwill and tradename affiliated with Read as of May 3, 2020. Based on our qualitative assessment we concluded that impairment indicators existed, such as our unfavorable financial performance during the fourth quarter of fiscal 2020 and the significant decline in the price per share of our common stock and market capitalization stemming from the COVID-19 global pandemic. As a result, we determined it was more-likely-than-not that the goodwill associated with our mattress fabrics segment and the goodwill and tradename affiliated with Read were impaired, and therefore, we conducted quantitative asset impairment tests. Consequently, based on the results of our quantitative asset impairment tests as of May 3, 2020, we recorded an asset impairment charge totaling $ i 13.6 million during our fourth quarter of fiscal 2020 for the entire carrying amount of our goodwill associated with our mattress fabrics segment and Read. Additionally, we recorded an asset impairment charge of $ i 143,000 during the fourth quarter of fiscal 2020 which reduced the carrying amount of Read’s tradename to its fair value of $ i 540,000.

Our fair values associated with our goodwill and tradename were determined using a discounted cash flow and the relief from royalty methods, respectively. These methods used significant unobservable inputs, and therefore, the fair values of our goodwill and tradename were classified within level 3 of the fair value hierarchy.

Discontinued Operation – Home Accessories Segment

During the fourth quarter of fiscal 2020, we record asset impairment charges totaling $ i 6.6 million, of which $ i 4.2 million and $ i 2.4 million were for the entire remaining carrying value associated with our former home accessories segment’s tradename and goodwill. These impairment charges were based on the expected selling price of our entire ownership interest in eLuxury in

I-17

comparison to its carrying amount. As disclosed in Note 3 of the consolidated financial statements, effective March 31, 2020, we sold our entire ownership interest in eLuxury to its noncontrolling interest holder resulting in the elimination of the home accessories segment at such time. Based on the terms of the sale agreement, we did not receive any consideration for eLuxury’s net assets associated with the sale of our entire ownership in eLuxury. We believe the expected selling price represents a significant observable input and therefore, the fair values of our former home accessories segment’s tradename and goodwill were classified within level 2 of the fair value hierarchy.

12. Cash Flow Information

Interest and income taxes paid are as follows:

	Three months ended
(dollars in thousands)	August 2, 2020		August 4, 2019
Interest	$	i 60	$	—
Income taxes (1) (2)		i 9		i 1,822

(1)

In accordance with the provisions of the 2017 Tax Cuts and Jobs Act, corporate taxpayers were eligible to treat prior AMT credit carryforwards as refundable. Accordingly, we elected to treat our prior AMT credit carryforward balance of $ i 1.5 million as refundable, and as a result, i 50% of the $1.5 million refundable balance was expected to be received in each our fiscal years 2021 and 2022, respectively. Net income taxes paid for the three-month period ending August 2, 2020, included our first i 50% installment of our refundable balance totaling $ i 746,000.

In accordance with the provisions of the CARES Act, i 100% of AMT credit carryforwards for tax years beginning in the 2019 tax year were immediately refundable. Accordingly, we claimed credit for the remaining 50% installment of our refundable AMT credit carryforward in May 2020. We received our remaining 50% installment plus interest totaling $ i 764,000 during the second quarter of fiscal 2021.

(2)

The net income tax payments totaling $ i 9,000 during the first quarter of fiscal 2021 included income tax payments associated with our foreign jurisdictions totaling $ i 755,000 that were mostly offset by the U.S. income tax refund of $ i 746,000 received during the first quarter of fiscal 2021 as referenced in note (1) above. The income tax payments totaling $ i 1.8 million during the first quarter of fiscal 2020, represented income tax payments associated with our foreign jurisdictions totaling $ i 984,000 and a withholding tax payment of $ i 838,000 paid to the Chinese government for earnings and profits repatriated to the U.S. parent company.

/ /

13. Net (Loss) Income from Continuing Operations Per Share

Basic net (loss) income from continuing operations per share is computed using the weighted-average number of shares outstanding during the period. Diluted net (loss) income from continuing operations per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method.

Weighted average shares used in the computation of basic and diluted net (loss) income from continuing operations per share are as follows:

	Three months ended
(amounts in thousands)	August 2, 2020		August 4, 2019
Weighted average common shares outstanding, basic		i 12,287		i 12,399
Dilutive effect of stock-based compensation		—		i 11
Weighted average common shares outstanding, diluted		i 12,287		i 12,410

During the first quarter of fiscal 2021, i 27,153 shares of unvested common stock were not included in the computation of diluted net loss from continuing operations per share, as their effect would be antidilutive as result a result of the decrease in the price per share of our common stock during the reporting period in relation to the price per share of our common stock as of the respective grant dates of our stock-based compensation awards. During the first quarter of fiscal 2021, an additional i 6,675 shares of unvested common stock were not included in the computation of diluted net loss from continuing operations per share, as we incurred a net loss, in which their effect would be antidilutive. During the first quarter of fiscal 2020, i 612 shares of unvested common stock were not included in the computation of diluted net income from continuing operations per share as their effect would be antidilutive, as result of the decrease in the price per share of our common stock during the reporting period in relation to the price per share of our common stock as of the respective grant dates of our stock-based compensation awards.

I-18

14. Segment Information

Overall

Continuing Operations

Our continuing operations are classified into i two business segments: mattress fabrics and upholstery fabrics.

Mattress Fabrics

The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers.

Upholstery Fabrics

The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. Additionally, the segment includes Read, a wholly-owned subsidiary, which is a turn-key provider of window treatments and sourcing of upholstery fabrics and other products, as well as measuring, and installation services of Read’s own products for the hospitality and commercial industries. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.

Discontinued Operation – Home Accessories Segment

As disclosed in Note 3 of the consolidated financial statements, we sold our entire ownership interest in eLuxury on March 31, 2020, and consequently our home accessories segment was eliminated at such time. Thus, the results of operations associated with our home accessories segment were excluded from our continuing operations and presented as a discontinued operation in our consolidated financial statements.

Our former home accessories segment was our finished products business that manufactured, sourced, and sold bedding accessories and home goods directly to consumers and businesses through global e-commerce, business-to-business, and other sales channels.

See Note 3 of the consolidated financial statements for detailed financial information of our former home accessories segment. As disclosed in Note 3, a reconciliation is provided that has detailed balance sheet information as of August 4, 2019, that is reconciled to captions titled “current assets – discontinued operation”, “noncurrent assets – discontinued operation”, current liabilities – discontinued operation”, and “noncurrent liabilities – discontinued operation” presented in the Consolidated Balance Sheet as of August 4, 2019. Also, a reconciliation is provided that pertains to detailed income statement information disclosed in Note 3 and is reconciled to net loss from discontinued operation presented in the Consolidated Statements of Net Income for the three-month period ending August 4, 2019.

Financial Information

We evaluate the operating performance of our current business segments based upon income (loss) from continuing operations before certain unallocated corporate expenses, asset impairments, restructuring credit (expense) and restructuring related charges, and other non-recurring items. Cost of sales for each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their staff, all costs associated with being a public company, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets. The mattress fabrics segment also includes in segment assets its investment in an unconsolidated joint venture. i Goodwill and intangible assets are not included in segment assets, as these assets are not used by the Chief Operating Decision Maker to evaluate the respective segment’s operating performance, allocate resources to the individual segments, or determine executive compensation.

I-19

Statements of operations for our current operating segments are as follows:

	Three months ended
	August 2, 2020			August 4, 2019
net sales by segment:
mattress fabrics	$	i 36,103		$	i 38,859
upholstery fabrics		i 28,361			i 31,860
net sales	$	i 64,464		$	i 70,719
gross profit from continuing operations by segment:
mattress fabrics	$	i 4,608		$	i 5,691
upholstery fabrics		i 5,293			i 6,721
gross profit from continuing operations	$	i 9,901		$	i 12,412
selling, general, and administrative expenses by segment:
mattress fabrics	$	i 2,763		$	i 3,071
upholstery fabrics		i 3,180			i 3,846
unallocated corporate expenses		i 2,075			i 2,232
selling, general, and administrative expenses	$	i 8,018		$	i 9,149
income (loss) from continuing operations by segment:
mattress fabrics	$	i 1,845		$	i 2,620
upholstery fabrics		i 2,113			i 2,875
unallocated corporate expenses		( i 2,075	)		( i 2,232	)
subtotal		i 1,883			i 3,263
restructuring credit		—			i 35
total income from continuing operations	$	i 1,883		$	i 3,298
interest expense		( i 51	)		—
interest income		i 58			i 260
other expense		( i 366	)		( i 95	)
income before income taxes from continuing operations	$	i 1,524		$	i 3,463

I-20

Balance sheet information for our current operating segments follows:

(dollars in thousands)

Segment assets:

Mattress Fabrics

Accounts receivable

i 15,585

i 12,632

i 12,212

Inventory

i 20,070

i 24,410

i 26,620

Property, plant and equipment (1)

i 39,597

i 43,211

i 40,682

Right of use assets (2)

i 832

i 235

i 362

Investment in unconsolidated joint venture

i 1,759

i 1,520

i 1,602

Total mattress fabrics assets

i 77,843

i 82,008

i 81,478

Upholstery Fabrics

Accounts receivable

i 14,308

i 11,029

i 12,881

Inventory

i 20,332

i 23,183

i 21,287

Property, plant and equipment (3)

i 1,634

i 1,856

i 1,633

Right of use assets (4)

i 3,802

i 3,054

i 1,633

Total upholstery fabrics assets

i 40,076

i 39,122

i 37,434

Total segment assets

i 117,919

i 121,130

i 118,912

Non-segment assets:

Cash and cash equivalents

i 39,986

i 44,236

i 69,790

Short-term investments - available for sale

i 983

—

i 923

Short-term investments - held-to-maturity

i 5,092

—

i 4,271

Current income taxes receivable

i 782

i 776

i 1,585

Current assets - discontinued operation

—

i 3,557

—

Other current assets

i 3,547

i 2,617

i 2,116

Deferred income taxes

i 593

i 486

i 793

Property, plant and equipment (5)

i 820

i 408

i 832

Right of use assets (6)

i 1,809

i 2,199

i 1,908

Goodwill

—

i 13,569

—

Intangible assets

i 3,286

i 3,805

i 3,380

Long-term investments - rabbi trust

i 7,916

i 7,347

i 7,834

Long-term investments - held-to-maturity

i 1,314

—

i 2,076

Noncurrent income taxes receivable

—

i 733

—

Other assets

i 540

i 526

i 664

Long-term note receivable affiliated with discontinued operation

—

i 1,800

—

Noncurrent assets - discontinued operation

—

i 23,058

—

Total assets

i 184,587

i 226,247

i 215,084

	Three months ended
(dollars in thousands)	August 2, 2020		August 4, 2019
Capital expenditures (7):
Mattress Fabrics	$	i 545	$	i 669
Upholstery Fabrics		i 113		i 184
Unallocated Corporate		i 68		i 56
Total capital expenditures	$	i 726	$	i 909
Depreciation expense:
Mattress Fabrics	$	i 1,631	$	i 1,620
Upholstery Fabrics		i 191		i 190
Discontinued Operation		—		i 95
Total depreciation expense	$	i 1,822	$	i 1,905

(1)

The $ i 39.6 million as of August 2, 2020, represents property, plant, and equipment of $ i 27.0 million and $ i 12.6 million located in the U.S. and Canada, respectively. The $ i 43.2 million as of August 4, 2019, represents property, plant, and equipment of $ i 31.2 million and $ i 12.0 million located in the U.S. and Canada, respectively. The $ i 40.7 million as of May 3, 2020, represents property, plant, and equipment of $ i 27.7 million and $ i 13.0 million located in the U.S. and Canada, respectively.

(2)	The $ i 832 as of August 2, 2020 represents right of use assets of $ i 297 and $ i 535 located in the U.S. and Canada, respectively. The $ i 235 as of August 4, 2019, and the $ i 362 as of May 3, 2020, represents right of use assets located in the U.S.

(3)

The $ i 1.6 million as of August 2, 2020, represents property, plant, and equipment of $ i 1.2 million and $ i 456 located in the U.S. and China, respectively. The $ i 1.9 million as of August 4, 2019, represents property, plant, and equipment of $ i 1.3 million and $ i 548 located in the U.S. and China, respectively. The $ i 1.6 million as of May 3, 2020, represents property, plant, and equipment of $ i 1.2 million and $ i 471 located in the U.S. and China, respectively.

I-21

(4)

The $ i 3.8 million as of August 2, 2020, represents right of use assets of $ i 3.1 million and $ i 710 located in China and the U.S., respectively. The $ i 3.1 million as of August 4, 2019, represents right of use assets of $ i 1.8 million and $ i 1.3 million located in China and the U.S., respectively. The $ i 1.6 million as of May 3, 2020, represents right of use assets of $ i 857 and $ i 776 located in the U.S. and China, respectively.

(5)

The $ i 820, $ i 408, and $ i 832 as of August 2, 2020, August 4, 2019, and May 3, 2020, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by our mattress fabrics and upholstery fabrics segments. Property, plant, and equipment associated with our corporate departments reside in the U.S.

(6)	The $ i 1.8 million, $ i 2.2 million, and $ i 1.9 million as of August 2, 2020, August 4, 2019, and May 3, 2020, respectively, represents right of use assets located in the U.S

(7)	Capital expenditure amounts are stated on the accrual basis. See Consolidated Statements of Cash Flows for capital expenditure amounts on a cash basis.

15. Income Taxes

Income Tax Expense

Total income tax expense for the three-month periods ending August 2, 2020, and August 4, 2019, were allocated as follows:

	August 2,		August 4,
(dollars in thousands)	2020		2019
income from continuing operations	$	i 4,324	$	i 1,692
loss from discontinued operations		—		( i 11	)
	$	i 4,324	$	i 1,681

Effective Income Tax Rate

We recorded income tax expense of $ i 4.3 million, or i 283.7% of income before income taxes from continuing operations, for the three-month period ended August 2, 2020, compared with income tax expense of $ i 1.7 million, or i 48.9% of income before income taxes from continuing operations, for the three-month period ended August 4, 2019. Our effective income tax rates associated with our continuing operations for the three-month periods ended August 2, 2020, and August 4, 2019, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China and Canada versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the principal differences between income tax expense from continuing operations at the U.S. federal income tax rate and the effective income tax rate from continuing operations reflected in the consolidated financial statements for the three-month periods ending August 2, 2020 and August 4, 2019:

	August 2,			August 4,
	2020			2019
U.S. federal income tax rate		i 21.0	%		i 21.0	%
U.S. valuation allowance		i 474.4			—
U.S. income tax law change		( i 232.5	)		—
Global Intangible Low Taxed Income Tax (GILTI)		—			i 13.6
Foreign income tax rate differential		i 19.6			i 10.2
Other		i 1.2			i 4.1
		i 283.7	%		i 48.9	%

U.S. Tax Law Change

Effective July 20, 2020, the U.S Treasury Department finalized and enacted previously proposed regulations regarding the Global Intangible Low Taxed Income (“GILTI”) tax provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Prior to this enactment, GILTI represented a significant U.S. income tax on our foreign earnings during fiscal 2019 ($ i 2.1 million) and fiscal 2020 ($ i 1.9 million). With the enactment of these final regulations, we are now eligible for an exclusion from GILTI since we meet the provisions for the GILTI High-Tax exception included in the final regulations. In addition, the enactment of the new regulations and our eligibility for the GILTI High-Tax exception are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years.

I-22

As a result of the newly enacted regulations, we recorded a non-cash income tax benefit of $ i 3.5 million resulting from the re-establishment of certain U.S. federal net operating loss carryforwards. This $ i 3.5 million income tax benefit was recorded as a discrete event in which its full income tax effects were recorded in the first quarter of fiscal 2021.

Valuation Allowance

In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.

As a result of the U.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against our U.S. net deferred income taxes, as GILTI represented a significant source of our U.S. taxable income during fiscal 2019 and 2020 that offset our U.S. pre-tax losses during such years, and which offset is now reversed as a result of the retroactivity of the new regulations. Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulative U.S. taxable losses during our last two fiscal years and we currently expect our history of U.S. pre-tax losses to continue into fiscal 2021, as a result of the continuing economic uncertainty associated with the COVID-19 global pandemic. As a result of the significant weight of this negative evidence, we believe it is more-likely-than-not that our U.S. net deferred income tax assets will not be fully realizable. Accordingly, we recorded a non-cash income tax charge of $ i 7.0 million to provide for a full valuation allowance against our U.S. net deferred income tax assets. This $ i 7.0 million income tax charge was recorded as a discrete event in which its full income tax effects were recorded during the first quarter of fiscal 2021.

Additionally, we recorded a $ i 271,000 income tax charge through our first quarter of fiscal 2021 to provide for a full valuation allowance against a U.S. income tax loss carryforward that is originating during the current fiscal year. The $ i 271,000 was included in our annual effective income tax rate and not treated as a discrete event.

Based on our assessments as of August 2, 2020, August 4, 2019, and May 3, 2020, valuation allowances against our net deferred income taxes pertain to the following:

(dollars in thousands)